UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 


 

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 29, 2014

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from        to

 

 

Commission File No. 0-14225

 


 

  

 

EXAR CORPORATION

(Exact Name of Registrant as specified in its charter)

 

     

Delaware

 

94-1741481

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

48720 Kato Road, Fremont, CA 94538

(Address of principal executive offices, Zip Code)

 

(510) 668-7000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒     No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒    No  ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    ☐            Accelerated filer    ☒            

Non-accelerated filer    ☐          (Do not check if a smaller reporting company)         Smaller reporting company    ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

The number of shares outstanding of the Registrant’s Common Stock was 47,344,916 as of August 6, 2014.

 



 

 
 

 

 

EXAR CORPORATION AND SUBSIDIARIES

 

INDEX TO

 

QUARTERLY REPORT ON FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2014

 

   

Page

 

PART I – FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

3

 

Condensed Consolidated Balance Sheets (Unaudited)

3

 

Condensed Consolidated Statements of Operations (Unaudited)

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

5

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

     
 

PART II – OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 6.

Exhibits

55

 

Signatures

56

 

Index to Exhibits

57

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

   

June 29,

   

March 30,

 
   

2014

   

2014

 

ASSETS

               
                 

Current assets:

               

Cash and cash equivalents

  $ 123,161     $ 14,614  
Restricted cash     26,000        

Short-term marketable securities

          152,420  

Accounts receivable (net of allowances of $1,029 and $1,178)

    26,596       15,023  

Accounts receivable, related party (net of allowances of $599 and $608)

    2,524       3,309  

Inventories

    31,988       28,982  

Other current assets

    5,717       3,549  

Total current assets

    215,986       217,897  
                 

Property, plant and equipment, net

    20,644       21,280  

Goodwill

    45,017       30,410  

Intangible assets, net

    109,041       31,390  

Other non-current assets

    1,448       1,240  

Total assets

  $ 392,136     $ 302,217  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 15,883     $ 15,488  

Accrued compensation and related benefits

    6,271       4,174  

Deferred income and allowances on sales to distributors

    3,737       1,765  

Deferred income and allowances on sales to distributors, related party

    9,962       9,349  

Short-term debt financing

    65,000        

Other current liabilities

    16,257       11,370  

Total current liabilities

    117,110       42,146  
                 

Long-term lease financing obligations

    40       70  

Other non-current obligations

    10,651       6,626  

Total liabilities

    127,801       48,842  
                 

Commitments and contingencies (Notes 14, 15 and 16)

               
                 

Stockholders' equity:

               

Common stock, $.0001 par value; 100,000,000 shares authorized; 47,272,056 and 47,336,005 shares outstanding

    112       5  

Additional paid-in capital

    512,284       508,116  

Accumulated other comprehensive loss

    (25 )     (1,079 )

Accumulated deficit

    (265,773 )     (253,667 )

Total Exar Corporation stockholders' equity

    246,598       253,375  

Non-controlling interests

    17,737        

Total stockholders' equity

    264,335       253,375  

Total liabilities and stockholders’ equity

  $ 392,136     $ 302,217  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
3

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

 
   

June 29,

   

June 30,

 
   

2014

   

2013

 

Sales:

               

Net sales

  $ 21,698     $ 23,858  

Net sales, related party

    9,021       8,769  

Total net sales

    30,719       32,627  
                 

Cost of sales:

               

Cost of sales

    12,353       11,812  

Cost of sales, related party

    3,838       3,907  

Amortization of purchased intangible assets and inventory step-up cost

    3,545       1,350  

Restructuring charges and exit costs

    27       81  

Total cost of sales

    19,763       17,150  

Gross profit

    10,956       15,477  
                 

Operating expenses:

               

Research and development

    8,243       6,180  

Selling, general and administrative

    10,077       7,354  

Merger and acquisition costs

    4,050       465  

Restructuring charges and exit costs

    369       931  
Net change in fair value in contingent consideration     (431 )      

Total operating expenses

    22,308       14,930  

Income (loss) from operations

    (11,352 )     547  

Other income and expense, net:

               

Interest income and other, net

    290       287  

Interest expense

    (486 )     (37 )

Total other income and expense, net

    (196 )     250  

Income (loss) before income taxes

    (11,548 )     797  

Provision for (benefit from) income taxes

    692       (9 )

Net income (loss)

    (12,240 )     806  

Less: Net income attributable to non-controlling interests

    135        

Net income (loss) attributable to Exar Corporation

  $ (12,105 )   $ 806  
                 

Net income (loss) per share:

               

Basic

  $ (0.26 )   $ 0.02  

Diluted

    (0.26 )     0.02  
                 

Shares used in the computation of net income (loss) per share:

               

Basic

    47,236       46,805  

Diluted

    47,236       48,085  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
4

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

   

Three Months Ended

 
   

June 29,

   

June 30,

 
   

2014

   

2013

 

Net income (loss)

  $ (12,105 )   $ 806  

Changes in market value of investments:

               
Changes in unrealized losses     199       (584 )

Reclassification adjustment for net realized gains (losses)

    26       (59 )

Release of tax provision for unrealized gains

    828        

Net change in market value of investments

    1,053       (643 )

Comprehensive income (loss)

    (11,052 )     163  

Less: comprehensive income attributable to non-controlling interests

    135        

Comprehensive income (loss) attributable to Exar Corporation

  $ (10,917 )   $ 163  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
5

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Three Months Ended

 
   

June 29,

   

June 30,

 
   

2014

   

2013

 

Cash flows from operating activities:

               

Net income (loss)

  $ (12,240 )   $ 806  

Reconciliation of net income (loss) to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    3,309       2,850  

Stock-based compensation expense

    3,127       1,087  

Release of deferred tax valuation allowance

    828        

Net change in fair value of contingent consideration

    (431 )      

Changes in operating assets and liabilities:

               

Accounts receivable and accounts receivable, related party

    (692 )     (3,026 )

Inventories

    944       39  

Other current and non-current assets

    (1,460 )     184  

Accounts payable

    (3,824 )     3,101  

Accrued compensation and related benefits

    (538 )     141  

Other current and non-current liabilities

    255       (4,647 )

Deferred income and allowance on sales to distributors and related party distributor

    2,585       448  

Net cash provided by (used in) operating activities

    (8,137 )     983  
                 

Cash flows from investing activities:

               

Purchases of property, plant and equipment and intellectual property, net

    (551 )     (349 )

Purchases of short-term marketable securities

    (9,296 )     (63,332 )

Proceeds from maturities of short-term marketable securities

    3,997       10,457  

Proceeds from sales of short-term marketable securities

    158,412       73,666  

Acquisition of Integrated Memory Logic, net of cash received

    (72,659 )      
Restricted cash     (26,000 )      

Other disposal (investment) activities

          125  

Net cash provided by investing activities

    53,903       20,567  
                 

Cash flows from financing activities:

               

Proceeds from issuance of common stock

    1,380       1,497  

Purchase of stock for withholding taxes on vested restricted stock

    (569 )     (977 )

Issuance of debt

    91,000        

Repayment of debt

    (26,000 )      

Repurchase of common stock

    (3,000 )      

Payments of lease financing obligations

    (30 )     (330 )

Net cash provided by financing activities

    62,781       190  
                 

Net increase in cash and cash equivalents

    108,547       21,740  

Cash and cash equivalents at the beginning of period

    14,614       14,718  

Cash and cash equivalents at the end of period

  $ 123,161     $ 36,458  
                 

Supplemental disclosure of cash flow and non-cash information

               

Issuance of common stock in connection with Hifn acquisition & others

          10  

Cash paid for income taxes

    21       62  

Cash paid for interest

    486       37  

Release of restricted stock upon vesting

    408        

  

See accompanying Notes to Condensed Consolidated Financial Statements.

  

 
6

 

 

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

 

Description of Business— Exar Corporation was incorporated in California in 1971 and reincorporated in Delaware in 1991. Exar Corporation and its subsidiaries (“Exar” or “we”) is a fabless semiconductor company that designs, develops and markets high-performance integrated circuits and system solutions for the Communications, High-End Consumer, Industrial & Embedded Systems, and Networking & Storage markets. Exar's broad product portfolio includes analog, display, LED lighting, mixed-signal, power management, connectivity, data management, and video processing solutions.

 

Basis of Presentation and Use of Management Estimates—The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 30, 2014 as filed with the SEC. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, that we believe are necessary for a fair statement of Exar’s financial position as of June 29, 2014 and our results of operations for the three months ended June 29, 2014 and June 30, 2013, respectively. These condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.

 

The financial statements include management’s estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Actual results could differ from those estimates, and material effects on operating results and financial position may result.

 

Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal years 2015 and 2014 both consist of 52 weeks.

 

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2013, the FASB issued amended standards that provided explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists. Under the amended standards, the unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. These amended standard updates are effective for our interim period beginning after December 15, 2013 and applied prospectively with early adoption permitted. The adoption of this guidance did not have any material impact on our financial position, results of operations or cash flows.

 

In May 2014, the FASB issued a new standard, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”) that would (1) provide a more robust framework for addressing revenue recognition; (2) improve comparability of revenue recognition practice across entities, industries, jurisdictions, and capital markets; and (3) provide more useful information to users of financial statements through improved disclosure requirements. This standard is effective for annual reporting periods beginning after December 15, 2016. Exar is currently evaluating the effect the adoption of this standard will have, if any, on our consolidated financial position, results of operations or cash flows.

 

In June 2014, the FASB issued amended standards to provide explicit guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Under the amended standards, a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition and therefore, should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. This standard is effective for annual reporting periods beginning after December 15, 2015. Exar is currently evaluating the effect the adoption of this standard will have, if any, on our consolidated financial position, results of operations or cash flows.

 

 
7

 

 

NOTE 3.    BUSINESS COMBINATIONS

 

We periodically evaluate potential strategic acquisitions to broaden our product offering and build upon our existing library of intellectual property, human capital and engineering talent, in order to expand our capabilities in the areas in which we operate or to acquire complementary businesses.

 

We account for each business combination by applying the acquisition method, which requires (1) identifying the acquiree; (2) determining the acquisition date; (3) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest we have in the acquiree at their acquisition date fair value; and (4) recognizing and measuring goodwill or a gain from a bargain purchase.

 

Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, we typically account for the acquired contingencies using existing guidance for a reasonable estimate.

 

To establish fair value, we measure the price that would be received for an asset or paid to transfer a liability in an ordinary transaction between market participants. The measurement assumes the highest and best use of the asset by the market participants that would maximize the value of the asset or the group of assets within which the asset would be used at the measurement date, even if the intended use of the asset is different.

 

Acquisition related costs, including finder’s fees, advisory, legal, accounting, valuation and other professional or consulting fees are accounted for as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issue debt or equity securities are recognized in accordance with other applicable GAAP.

 

Acquisition of Integrated Memory Logic

  

On June 3, 2014, we acquired approximately 92% of outstanding shares of  Integrated Memory Logic Limited (“iML”), a leading provider of analog mixed-signal solutions for the flat panel display market. The iML acquisition supports Exar's strategy of building a large scale diversified analog mixed-signal business. iML’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our condensed consolidated financial statements beginning June 4, 2014.

 

Consideration

 

In June 2014, we acquired approximately 92% of iML outstanding shares for $206.4 million in cash. We expect to pay an additional $17.9 million in cash in exchange for the remaining approximately 8% of outstanding shares, at which time iML will become a wholly owned subsidiary. When iML becomes a wholly owned subsidiary of Exar, it is anticipated that we will assume iML’s employee then outstanding options, preliminarily valued at approximately $3.3 million, and will be converted into an option to purchase a number of Exar’s common stock. The number of shares of Exar’s common stock, as well as the exercise price of the options will be determined based upon an agreed upon option exchange ratio outlined in the merger agreement by and between IML and Exar’s subsidiary, Image Sub Limited dated April 26, 2014. The option exchange ratio is calculated based upon (i) the ratio of the purchase price per share of iML’s stock and Exar’s stock price, and (ii) for those options denominated in Taiwanese dollars, the then currency exchange rates.

 

In accordance with Accounting Standard Codification (“ASC”) 805, Business Combinations, the acquisition of approximately 92% of iML’s outstanding shares was recorded as a purchase business acquisition since iML was considered a business. Under the purchase method of accounting, the fair value of the consideration was allocated to net assets acquired. The fair value of purchased identifiable intangible assets was determined using discounted cash flow models from operating projections prepared by management using an internal rate of return of 16.9%. The excess of the preliminary fair value of consideration paid over the preliminary fair values of net assets acquired and identifiable intangible assets resulted in recognition of goodwill of approximately $14.6 million. Goodwill is primarily from expected synergies resulting from combining the operations of iML with that of Exar and is not deductible for tax purposes.

 

The total purchase consideration for iML will be approximately $227.6 million and will be comprised of the following items (in thousands):

 

Acquisition of approximately 68.3 million shares of iML at NT$91.00 per share in cash

  $ 206,411  

Fair value of non-controlling interest shares

    17,872  

Fair value of iML employee options to be assumed

    3,327  

Total purchase price

  $ 227,610  

 

Preliminary Purchase Price Allocation

 

The allocation of the total preliminary purchase price to iML’s tangible and identifiable intangible assets and liabilities assumed was based on their estimated fair values at the date of acquisition.

 

 
8

 

 

The preliminary fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed in the iML acquisition was as follows (in thousands):

 

   

Amount

 

Identifiable tangible assets (liabilities)

       

Cash

  $ 133,752  

Accounts receivable

    10,096  

Inventories

    3,950  

Other current assets

    608  

Property, plant and equipment

    480  

Other assets

    308  

Accrued expenses

    (8,137

)

Accounts payable

    (4,219

)

Long-term liabilities

    (3,595

)

Total identifiable tangible assets (liabilities), net

    133,243  

Identifiable intangible assets

    79,760  

Total identifiable assets, net

    213,003  

Goodwill

    14,607  

Fair value of total consideration transferred

  $ 227,610  

 

The following table sets forth the components of identifiable intangible assets acquired in connection with the iML acquisition (in thousands):

 

   

Fair Value

 

Developed technologies

  $ 55,570  

In-process research and development

    8,040  

Distributor relationships

    5,980  

Customer relationships

    9,050  

Trade names

    1,120  

Total identifiable intangible assets

  $ 79,760  

 

In valuing specific components of the acquisition, that includes deferred taxes and intangibles, required us to make estimates that may be adjusted in the future, if new information is obtained about circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. Thus, the purchase price allocation is considered preliminary and dependent upon the finalization of the valuation of assets acquired and liabilities assumed, including income tax effects. Final determination of these estimates could result in an adjustment to the preliminary purchase price allocation, with an offsetting adjustment to goodwill.

 

Acquisition Related Costs

 

Acquisition related costs, or deal costs, relating to iML are included in the merger and acquisition costs and interest expense line on the condensed consolidated statement of operations for the first fiscal quarter of 2015 and were approximately $4.2 million.

 

Unaudited Pro Forma Financial Information

 

The following unaudited pro forma condensed financial information presents the combined revenue of Exar and iML as if the acquisition had occurred as of March 31, 2014 (in thousands).

 

   

Three months ended

June 29, 2014

   

Three months ended

June 30, 2013

 

Net sales

    41,286       49,177  
Net loss    $ (7,675

)

  $ (722 )

Less: Net loss attributable to non-controlling interests

    (105

)

    (122 )

Net loss attributable to Exar Corporation

  $ (7,570

)

  $ (600 )

Earnings per share

               

Basic

  $ (0.16

)

  $ (0.01 )
Diluted   $ (0.16 )   $ (0.01 )

 

 
9

 

 

The pro forma financial information includes (1) amortization charges from acquired intangible assets of $2.4 million for the three months ended June 29, 2014 and June 30, 2013, respectively; (2) amortization charges from inventory fair value adjustment of $1.5 million and $2.5 million for the three months ended June 29, 2014 and June 30, 2013, respectively; (3) the estimated stock-based compensation expense related to the stock options assumed of $0.2 million and $0.1 million for the three months ended June 29, 2014 and June 30, 2013, respectively; (4) the elimination of historical intangible assets of $92,000 for the three months ended June 29, 2014 and June 30, 2013, respectively; (5) the elimination of historical stock-based compensation charges recorded by iML of $0.2 million and $0.5 million for the three months ended June 29, 2014 and June 30, 2013, respectively, as a result of the cancellation of all outstanding options on the acquisition date; (6) the elimination of acquisition related costs of $8.2 million for the three months ended June 29, 2014; (7) the elimination of $1.8 million revenue and the related $0.9 million costs released from deferred margin for the three months ended June 29, 2014; (8) the elimination of $2.0 million revenue and the related $0.9 million costs released from the deferred margin for the three months ended June 30, 2013; and (9) the related tax provision of $0.2 million and $0.9 million for the three months ended June 29, 2014 and June 30, 2013, respectively. The unaudited pro forma condensed financial information is not intended to represent or be indicative of the condensed results of operations of Exar that would have been reported had the acquisition been completed as of the beginning of the periods presented, and should not be taken as representative of the future consolidated results of operations of Exar.

 

Acquisition of Stretch

 

On January 14, 2014, we completed the acquisition of Stretch, Inc. (“Stretch”), a provider of software configurable processors supporting the video surveillance market previously located in Sunnyvale, California. The transaction provides Exar with the technology to deliver an end-to-end high-definition solution for both digital and analog transmission of data from the camera to the DVR or NVR in surveillance applications. Stretch’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our condensed consolidated financial statements beginning January 14, 2014.

 

In accordance with Accounting Standard Codification (“ASC”) 805, Business Combinations, the total consideration paid for Stretch was first allocated to the net tangible liabilities assumed based on the estimated fair values of the assets and liabilities at the acquisition date. The excess of the fair value of the consideration paid over the fair value of Stretch’s net tangible liabilities assumed and identifiable intangible assets acquired resulted in the recognition of goodwill of $0.7 million primarily related to expected synergies to be achieved in connection with the acquisition. The goodwill is deductible over 15 years for tax purposes. The table below shows the allocation of the purchase price to tangible and intangible assets acquired and liabilities assumed (in thousands):

 

   

Amount

 

Tangible assets

  $ 2,937  

Intangible assets

    7,010  

Goodwill

    667  

Liabilities assumed

    (10,604

)

Fair value of total consideration transferred

  $ 10  

 

Acquisition of Cadeka

 

On July 5, 2013, we completed the acquisition of substantially all of the assets of Cadeka Technologies (Cayman) Holding Ltd., a privately held company organized under the laws of the Cayman Islands and all the outstanding stock of the subsidiaries of Cadeka, including the equity of its wholly owned subsidiary Cadeka Microcircuits, LLC, a Colorado limited liability company (“Cadeka”). With locations in Loveland, Colorado, Shenzhen and Wuxi, China, Cadeka designs, develops and markets high precision analog integrated circuits for use in industrial and high reliability applications. Cadeka’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our condensed consolidated financial statements beginning July 5, 2013. The pro forma effects of the portion of the Cadeka operations assumed through the transaction on our results of operations during fiscal 2014 were considered immaterial.

 

In accordance with ASC 805, Business Combinations, the total consideration paid for Cadeka was first allocated to the net tangible liabilities assumed based on the estimated fair values of the assets and liabilities at the acquisition date. The excess of the fair value of the consideration paid over the fair value of Cadeka’s net tangible liabilities assumed and identifiable intangible assets acquired resulted in the recognition of goodwill of $19.4 million primarily related of expected synergies from combining the operations of Cadeka with that of Exar and the release of deferred tax liabilities. The goodwill is not expected to be tax deductible.

 

The table below shows the allocation of the purchase price to tangible and intangible assets acquired and liabilities assumed (in thousands):

 

   

Amount

 

Tangible assets

  $ 3,286  

Intangible assets

    20,380  

Goodwill

    19,387  

Liabilities assumed

    (8,216

)

Fair value of total consideration transferred

  $ 34,837  

 

 
10

 

 

NOTE 4.

BALANCE SHEET DETAILS

 

Our inventories consisted of the following as of the dates indicated (in thousands):

 

   

June 29,

2014

   

March 30,

2014

 

Work-in-process and raw materials

  $ 20,597     $ 13,555  

Finished goods

    11,391       15,427  

Total inventories

  $ 31,988     $ 28,982  

 

Our property, plant and equipment consisted of the following as of the dates indicated below (in thousands):

 

   

June 29,

2014

   

March 30,

2014

 

Land

  $ 6,660     $ 6,660  

Building

    17,287       16,787  

Machinery and equipment

    43,108       40,675  

Software and licenses

    17,815       17,549  

Property, plant and equipment, total

    84,870       81,671  

Accumulated depreciation and amortization

    (64,226

)

    (60,391

)

Total property, plant and equipment, net

  $ 20,644     $ 21,280  


Our other current liabilities consisted of the following as of the dates indicated (in thousands):

 

   

June 29,

2014

   

March 30,

2014

 

Accrued acquisition costs

  $ 3,514     $  

Short-term lease financing obligations

    2,348       2,671  

Accrued manufacturing expenses, royalties and licenses

    2,094       1,639  

Accrued restructuring charges and exit costs

    1,971       2,214  

Accrued legal and professional services

    1,576       1,453  

Accrued income tax

    1,420       74  

Purchase consideration holdback

    1,006       1,256  

Accrued sales and marketing expenses

    564       666  

Fair value of earn out liability – short-term

          490  

Other

    1,764       907  

Total other current liabilities

  $ 16,257     $ 11,370  

 

Our other non-current obligations consisted of the following (in thousands) as of the dates indicated:

 

   

June 29,

2014

   

March 30,

2014

 

Long-term taxes payable

  $ 4,427     $ 794  

Fair value of earn out liability – long-term

    3,912       3,853  

Accrued retention bonus

    1,575       1,181  

Deferred tax liability

    608       614  

Accrued restructuring charges and exit costs

    109       155  

Other

    20       29  

Total other non-current obligations

  $ 10,651     $ 6,626  

 

NOTE 5.

FAIR VALUE

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

 
11

 

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Our cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

 

The fair value of contingent consideration arising from the acquisitions of Altior Inc. (“Altior”) and Cadeka Microcircuits LLC (“Cadeka”) are classified within Level 3 of the fair value hierarchy since it is based on a probability-based approach that includes significant unobservable inputs.

 

There were no transfers between Level 1, Level 2, and Level 3 during the fiscal quarter ended June 29, 2014.

 

As of June 29, 2014, we sold all of our short term investments to fund the iML acquisition. The following table summarizes our other investments assets and liabilities as June 29, 2014 (in thousands):

 

   

June 29, 2014

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Common shares of CounterPath

  $     $ 99     $     $ 99  
                                 

Liabilities:

                               

Acquisition-related contingent consideration – Altior

  $     $     $ 3,022     $ 3,022  

Acquisition-related contingent consideration – Cadeka

                890       890  

Total liabilities

  $     $ 99     $ 3,912     $ 4,011  

 

As of March 30, 2014, our investment assets and liabilities, measured at fair value on a recurring basis, were as follows (in thousands):

 

   

March 30, 2014

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Money market funds

  $ 4,636     $     $     $ 4,636  

U.S. government and agency securities

    9,378       13,134             22,512  

State and local government securities

          2,772             2,772  

Corporate bonds and securities

    5       71,248             71,253  

Asset-backed securities

          27,635             27,635  

Mortgage-backed securities

          28,248             28,248  

Total investment assets

  $ 14,019     $ 143,037     $     $ 157,056  
                                 

Liabilities:

                               

Acquisition-related contingent consideration – Altior

  $     $     $ 2,973     $ 2,973  

Acquisition-related contingent consideration – Cadeka

                1,370       1,370  

Total liabilities

  $     $     $ 4,343     $ 4,343  

 

 
12

 

 

Our cash, cash equivalents and short-term marketable securities as of the dates indicated below were as follows (in thousands):

 

   

June 29,

2014

   

March 30,

2014

 

Cash and cash equivalents

               

Cash at financial institutions

  $ 123,161     $ 9,978  
Restricted cash       26,000        

Cash equivalents

               

Money market funds

          4,636  

Total cash and cash equivalents

  $ 149,161     $ 14,614  
                 

Available-for-sale securities

               

U.S. government and agency securities

  $     $ 22,512  

State and local government securities

          2,772  

Corporate bonds and securities

          71,253  

Asset-backed securities

          27,635  

Mortgage-backed securities

          28,248  

Total short-term marketable securities

  $     $ 152,420  

 

Our marketable securities include U.S. government and agency securities, state and local government securities, corporate bonds and securities, asset-backed and mortgage-backed securities and certificate of deposit. We classify investments as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. We amortize premiums and accrete discounts to interest income over the life of the investment. Our available-for-sale securities, which we intend to sell as necessary to meet our liquidity requirements, are classified as cash equivalents if the maturity date is 90 days or less from the date of purchase and as short-term marketable securities if the maturity date is greater than 90 days from the date of purchase. As of June 29, 2014, $26.0 million of short term certificate deposit was used as collateral against our CTBC bridge loan and classified as restricted cash. See Note 9-“Short-term Debt”.

 

All marketable securities are reported at fair value based on the estimated or quoted market prices as of each balance sheet date, with unrealized gains or losses, net of tax effect, recorded in the condensed consolidated statements of other comprehensive income except those unrealized losses that are deemed to be other than temporary which are reflected in the impairment charges on investments line item on the condensed consolidated statements of operations.

  

We received approximately 93,000 common shares of CounterPath Corporation (“CounterPath”) through the Skypoint dissolution, of which we estimated the fair value using the market value of common shares as determined by trading on the Nasdaq CM market. These securities have been classified to Level 2 as of June 29, 2014 and recorded in the other non-current assets line item on the condensed consolidated balance sheet. We believe the fair value inputs of CounterPath do not meet all of the criteria for Level 1 classification primarily due to the low trading volume of the stock. See Note 7–Long-term Investments for the discussion on Skypoint.

 

The fair value of contingent consideration was determined based on probability-based approach which includes projected revenues, percentage probability of occurrence and discount rate to present value payments. A significant increase (decrease) in the projected revenue, discount rate or probability of occurrence in isolation could result in a significantly higher (lower) fair value measurement. We calculate the fair value of the contingent consideration on a quarterly basis based on a collaborative effort of our operations and financial accounting groups based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period.

 

Realized gains (losses) on the sale of marketable securities are determined by the specific identification method and are reflected in the interest income and other net, line item on the condensed consolidated statements of operations.

 

Our net realized gains (losses) on marketable securities for the periods indicated below were as follows (in thousands):

 

   

Three Months Ended

 
   

June 29, 2014

   

June 30, 2013

 

Gross realized gains

  $ 264     $ 218  

Gross realized losses

    (238 )     (277 )

Net realized gain (losses)

  $ 26     $ (59 )

 

 
13

 

 

The following table summarizes our investments in marketable securities as March 30, 2014 (in thousands):

 

   

March 30, 2014

 
   

Amortized Cost

   

Unrealized Gross

Gains (1)

   

Unrealized Gross

Losses (1)

   

Fair Value

 

Money market funds

  $ 4,636     $     $     $ 4,636  

U.S. government and agency securities

    22,550       1       (39

)

    22,512  

State and local government securities

    2,762       10             2,772  

Corporate bonds and securities

    71,309       32       (88

)

    71,253  

Asset-backed securities

    27,661       22       (48

)

    27,635  

Mortgage-backed securities

    28,362       24       (138

)

    28,248  

Total investments

  $ 157,280     $ 89     $ (313

)

  $ 157,056  

 

—————

 

(1)

Gross of tax impact of $828

 

Our asset-backed securities are comprised primarily of premium tranches of vehicle loans and credit card receivables, while our mortgage-backed securities are primarily from Federal agencies. We do not own auction rate securities nor do we own securities that are classified as subprime.

 

Management determines the appropriate classification of cash equivalents or short-term marketable securities at the time of purchase and reevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of premiums and accretion of discounts to maturity and such accretion/amortization, which is immaterial for the period presented, is included in the interest income and other, net line in the condensed statements of operations. Cash equivalents and short-term marketable securities are reported at fair value with the related unrealized gains and losses included in the accumulated other comprehensive losses line in the condensed consolidated balance sheets.

 

We periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, our intent not to sell the security, and whether it is more likely than not that we will not have to sell the security before recovery of its cost basis. For the three months ended June 29, 2014, no investments were identified with other-than-temporary declines in value.

 

The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale by expected maturity as of March 30, 2014 (in thousands):

 

   

March 30, 2014

 
   

Amortized Cost

   

Fair Value

 

Less than 1 year

  $ 49,539     $ 49,504  

Due in 1 to 5 years

    107,741       107,552  

Total

  $ 157,280     $ 157,056  

 

The following table summarizes the gross unrealized losses and fair values of our investments in an unrealized loss position as of March 30, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

   

March 30, 2014

 
   

Less than 12 months

   

12 months or greater

   

Total

 
   

Fair Value

   

Gross Unrealized Losses

   

Fair Value

   

Gross Unrealized Losses

   

Fair Value

   

Gross Unrealized Losses

 

U.S. government and agency securities

  $ 18,245     $ (39 )   $     $     $ 18,245     $ (39 )

Corporate bonds and securities

    48,379       (87 )     596       (1 )     48,975       (88 )

Asset-backed securities

    7,118       (12 )     5,478       (36 )     12,596       (48 )

Mortgage-backed securities

    19,682       (120 )     983       (18 )     20,665       (138 )

Total

  $ 93,424     $ (258 )   $ 7,057     $ (55 )   $ 100,481     $ (313 )

 

 
14

 

 

The fair value of contingent consideration was determined based on a probability-based approach which includes projected revenues, percentage probability of occurrence and discount rate to present value payments. A significant increase (decrease) in the projected revenue, discount rate or probability of occurrence in isolation could result in a significantly higher (lower) fair value measurement. 

 

The following table presents quantitative information about the inputs and valuation methodologies used for our fair value measurements classified in Level 3 of the fair value hierarchy as of June 29, 2014.

 

As of June 29, 2014

 

Fair Value

(in thousands)

 

Valuation Technique

 

Significant

Unobservable Input

 

Range

                       

Acquisition-related contingent consideration – Altior

 

$

3,022

 

Combination of income and market approach

 

Revenue (in ‘000’s)

 

$6,725

-

$20,175

 

  

 

       

Probability of Achievement

 

1%

-

66%

                       

Acquisition-related contingent consideration – Cadeka

 

$

890

 

Combination of income and market approach

 

Revenue (in ‘000’s)

 

$8,400

-

$18,000

             

Probability of Achievement

 

2%

-

30% 

 

We calculate the fair value of the contingent consideration on a quarterly basis based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period.

 

The change in the fair value of our Altior purchase consideration liability is as follows (in thousands):

 

   

Amount

 

As of March 30, 2014

  $ 2,973  

Adjustment to purchase consideration

    49  

As of June 29, 2014

  $ 3,022  

 

The change in the fair value of our Cadeka purchase consideration liability is as follows (in thousands):

 

   

Amount

 

As of March 30, 2014

  $ 1,370  

Adjustment to purchase consideration

    (480

)

As of June 29, 2014

  $ 890  

 

In the first quarter of fiscal 2015, the fair value of the contingent consideration for Altior acquisition increased by $49,000 due to the impact of change in present value of the amount payable due to passage of time. Contingent consideration for Cadeka acquisition decreased by $480,000 due to change in timing of achieving revenue targets and passage of time.

 

NOTE 6.

GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

  

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Estimations and assumptions regarding the number of reporting units, future performances, results of our operations and comparability of our market capitalization and net book value will be used. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one single operating segment and one chief operating decision maker, our President and Chief Executive Officer (“CEO”), we utilize an entity-wide approach to assess goodwill for impairment. As of June 29, 2014, no events or changes in circumstances suggest that the carrying amount for goodwill may not be recoverable and therefore we did not perform an interim goodwill impairment analysis.

 

 
15

 

 

The changes in the carrying amount of goodwill for first fiscal quarter of 2015 and 2014 were as follows (in thousands):

 

   

June 29, 2014

   

March 30, 2014

 

Beginning balance

  $ 30,410     $ 10,356  

Goodwill additions

    14,607       20,054  

Ending balance

  $ 45,017     $ 30,410  

 

Goodwill additions during the first quarter of fiscal 2015 consisted of $14.6 million residual allocation from the iML acquisition purchase price accounting. The goodwill additions during fiscal 2014 consist of $19.4 million and $0.7 million residual allocation from the Cadeka and Stretch acquisition purchase price accounting, respectively.

 

Intangible Assets

 

Our purchased intangible assets as of the dates indicated below were as follows (in thousands):

 

   

June 29, 2014

   

March 30, 2014

   

Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

   

Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

   

Amortized intangible assets:

                                                 

Existing technology

    118,781     $ (39,357 )   $ 79,424     $ 63,043     $ (37,510 )   $ 25,533    

Customer relationships

    15,145       (3,082 )     12,063       6,095       (2,762 )     3,333    

Distributor relationships

    7,244       (1,322 )     5,922       1,264       (1,260 )     4    

Patents/Core technology

    3,459       (3,395 )     64       3,459       (3,378 )     81    

Trade names

    1,330       (82 )     1,248       210       (51 )     159    

Total intangible assets subject to amortization

    145,959       (47,238 )     98,721       74,071       (44,961 )     29,110    

In-process research and development

    10,320             10,320       2,280             2,280    

Total

  $ 156,279       (47,238 )     109,041       76,351       (44,961 )     31,390    

 

Long-lived assets are amortized on a straight-line basis over their respective estimated useful lives. Existing technology is amortized over two to nine years. Customer relationships are amortized over five to seven years. Distributor relationships are amortized over six to seven years. Patents/core technology is amortized over five to six years. Trade names are amortized over three to six years. We expect the amortization of IPR&D to start in fiscal 2015. We evaluate the remaining useful life of our long-lived assets that are being amortized each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the long-lived asset is amortized prospectively over the remaining useful life.

 

Long-lived assets are evaluated for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets (or asset group) may not be fully recoverable. Whenever events or changes in circumstances suggest that the carrying amount of long-lived assets may not be recoverable, we estimate the future cash flows expected to be generated by the assets (or asset group) from its use or eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Significant management judgment is required in the grouping of long-lived assets and forecasts of future operating results that are used in the discounted cash flow method of valuation. If our actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

 

As of June 29, 2014, there were no indicators that required us to perform an intangible assets impairment review. Due to the decline in forecasted revenue related to certain acquired intangible assets, we recorded $1.6 million impairment charges in the fourth quarter of fiscal 2014.

 

The aggregate amortization expenses for our intangible assets for the periods indicated below were as follows (in thousands):

 

   

Three Months Ended

 
   

June 29,

2014

   

June 30,

2013

 

Amortization expense

  $ 2,277     $ 1,544  

 

 
16

 

 

The total future amortization expenses for our purchased intangible assets are summarized below (in thousands):

 

Amortization Expense (by fiscal year)

 

2015 (9 months remaining)

  $ 11,901  

2016

    15,339  

2017

    14,406  

2018

    14,193  

2019

    12,993  

2020 and thereafter

    29,889  

Total future amortization

  $ 98,721  

 

NOTE 7.

LONG-TERM INVESTMENT

 

In July 2001, Exar became a Limited Partner in the Skypoint Telecom Fund II (US), LP. (“Skypoint Fund”), a venture capital fund focused on investments in communications infrastructure companies. We accounted for this non-marketable equity investment under the cost method in the other non-current assets in the consolidated balance sheet. The partnership was dissolved and the fund distributed stock of investee companies to Exar during first quarter of fiscal 2015.

 

We regularly review and determine whether the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.

 

As of the dates indicated below, our long-term investment balance, which is included in the “Other non-current assets” line item on the condensed consolidated balance sheets, consisted of the following (in thousands):

 

   

June 29,

2014

   

March 30,

2014

 

Beginning balance

  $ 946     $ 1,288  

Net distributions

          (19 )

Impairment charges

          (323 )

Ending balance

  $ 946     $ 946  

 

The carrying amount of approximately $0.9 million as of June 29, 2014 reflects the net of the capital contributions, capital distributions and cumulative impairment charges. During the term of the fund we have made $4.8 million in capital contributions to Skypoint Fund since we became a limited partner in July 2001. As of June 29, 2014, we do not have any further capital commitments.

 

Impairment

 

We evaluate our long-term investment for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year by comparing the carrying amount to the fair value of the underlying investments. If the carrying amount exceeds its fair value, long term-investment is considered impaired and a second step is performed to measure the amount of impairment loss. We analyzed the fair value of the remaining underlying investments of Skypoint Fund and as a result, no impairment was recorded during the first quarter of fiscal 2015 and 2014. We recorded approximately $0.3 million impairment charges in the fourth quarter of fiscal 2014.

 

NOTE 8.      RELATED PARTY TRANSACTION

 

Alonim Investments Inc. (“Alonim”) owns approximately 7.6 million shares, or approximately 16%, of our outstanding common stock as of June 29, 2014. As such, Alonim is our largest stockholder.

 

Related party contributions as a percentage of our total net sales for the periods indicated below were as follows:

 

   

Three Months Ended

   

June 29,

2014

 

June 30,

2013

Alonim

    29 %     27 %

 

 
17

 

 

Related party receivables as a percentage of our net accounts receivable were as follows as of the dates indicated below:

 

   

June 29,

2014

 

March 30,

2014

Alonim

    9 %     18 %

 

Related party expenses for marketing promotional materials reimbursed were not significant for either the three months ended June 29, 2014 or June 30, 2013, respectively.

 

NOTE 9.

SHORT-TERM DEBT

 

As part of the acquisition of iML, we entered into short-term financing agreements with Stifel Financial Corporation (“Stifel”) and CTBC Bank Corporation (USA) (“CTBC”) to provide bridge financing for the acquisition.

 

As of the date indicated below, our short-term debts principal balances, which is included in the Other current liabilities line item on the condensed consolidated balance sheets, consisted of the following (in thousands):

 

   

June 29,

2014

 

Stifel

  $ 65,000  

Repayment

    (26,000 )

CTBC

    26,000  

Total short-term debt

  $ 65,000  

 

Stifel

 

On May 27, 2014 (the “Initial Funding Date”), Exar entered into a bridge credit agreement (the “Credit Agreement”) certain lenders party and Stifel Financial Corp., as Administrative Agent. The Credit Agreement provided Exar with a bridge term loan credit facility in an aggregate principal amount of up to $90.0 million (the “Bridge Facility”).

 

Interest on loans made under the Bridge Facility accrues, at Exar’s option, at a rate per annum equal to (1) the Base Rate (as defined below) plus (a) during the first 90 days following the Initial Funding Date, 7.5% and (b) thereafter, 8.5% or (2) 1-month LIBOR plus (a) during the first 90 days following the Initial Funding Date, 8.5% and (b) thereafter, 9.5%. The “Base Rate” is equal to, for any day, a rate per annum equal to the highest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) 1 month LIBOR plus 1.00%. The Base Rate is subject to a floor of 2.5%, and LIBOR is subject to a floor of 1.5%. The interest rate for June, 2014 was 8.65%.

 

Exar had drawn $50.0 million and $15.0 million on May 27, 2014 and May 29, 2014, respectively to fund the acquisition of approximately 92% of iML’s outstanding shares. We repaid $26.0 million of the debt in June 2014 through a loan from CTBC with lower interest rate. As of July, 2014, the Stifel loan has been completely paid off through an intercompany loan from iML. See Note 19 – Subsequent Event”.

 

CTBC

 

On June 9, 2014 we entered into a Business Loan Agreement with CTBC to provide a loan for $26.0 million to partially pay off the Stifel loan. This loan bears an interest rate of 3.25% and matures on December 9, 2014. Interest payments are due monthly with the entire principal due not later than December 9, 2014.

 

All obligations of Exar under the Business Loan Agreement are unconditionally guaranteed by iML through a $26.0 million short-term certificate deposit with the same institution.

 

 
18

 

 

Interest

 

As of the date indicated below, interest on our short-term debt, which is included in the “Interest expense” line item on the condensed consolidated statement of operations, consisted of the following (in thousands):

 

   

June 29,

2014

 

Stifel

  $ 402  

CTBC

    45  

Total interest expense

  $ 447  

 

NOTE 10.

COMMON STOCK REPURCHASES

 

From time to time, we acquire outstanding common stock in the open market to partially offset dilution from our equity award programs, to increase our return on our invested capital and to bring our cash to a more appropriate level for Exar.

 

On August 28, 2007, we announced the approval of a share repurchase plan (“2007 SRP”) and authorized the repurchase of up to $100.0 million of our common stock.

 

On July 9, 2013, we announced the approval of a share repurchase program under which we were authorized to repurchase an additional $50.0 million of our common stock. The repurchase program does not have a termination date, and may be modified, extended or terminated at any time. We intend to retire all shares repurchased under the stock repurchase plan. The purchase price for the repurchased shares of Exar is reflected as a reduction of common stock and additional paid-in capital. We may continue to repurchase our common stock under the repurchase plan, which would reduce our cash, cash equivalents and/or short-term marketable securities available to fund future operations and to meet other liquidity requirements.

 

Stock repurchase activities during first quarter of fiscal 2015 and fiscal 2014 were indicated below (in thousands, except per share amounts):

 

   

Total number of

Shares Purchased

 

Average Price

Paid Per Share

(or Unit)

 

Amount Paid

for Purchase

Balances, March 31, 2013

    9,564     $ 9.22     $ 88,189  

Repurchases – August 25 to September 29, 2013

    153       13.07       1,999  

Repurchases – September 30 to October 27, 2013

    73       13.63       1,001  

Repurchases – November 24 to December 29, 2013

    83       12.09       1,000  

Repurchases – December 30, 2013 to January 26, 2014

    122       11.61       1,417  

Repurchases – January 27 to February 23, 2014

    324       11.05       3,583  

Balances, March 30, 2014

    10,319     $ 9.22     $ 97,189  

Repurchases – March 31 to April 27, 2014

    273       10.98       3,000  

Balances, June 29, 2014

    10,592     $ 9.46     $ 100,189  

 

—————

Note: The average price paid per share is based on the total price paid by Exar, which includes applicable broker fees.

 

NOTE 11.

RESTRUCTURING CHARGES AND EXIT COSTS

 

2015 Restructuring Charges and Exit Costs

 

During the first quarter of fiscal 2015, we incurred $0.4 million restructuring charges and exit costs mainly due to severance benefit payments made.

 

2014 Restructuring Charges and Exit Costs

 

During the first quarter of fiscal 2014, we incurred $1.0 million restructuring charges and exit costs. The charges include $0.9 million of severance benefits and $0.1 million of costs related to the preparation for the sale of Exar campus in Fremont, California.

 

 
19

 

 

Our restructuring liabilities were included in the other current liabilities and other non-current obligations lines within our condensed consolidated balance sheets. The following table summarizes the activities affecting the liabilities as of the dates indicated below (in thousands):

 

   

March 30,

2014

   

Additions/

adjustments

   

Non-cash

charges

   

Payments

   

June 29,

2014

 

Lease termination costs and others

  $ 1,615     $ 60     $ (77

)

  $ (92

)

  $ 1,506  

Severance

    754       336             (516

)

    574  

Total

  $ 2,369     $ 396     $ (77

)

  $ (608

)

  $ 2,080  

 

   

April 1,

2013

   

Additions/

adjustments

   

Non-cash

charges

   

Payments

   

March 30,

2014

 

Lease termination costs and others

  $ 2,860     $ 570     $ (57

)

  $ (1,758

)

  $ 1,615  

Severance

    426       2,444             (2,116

)

    754  

Total

  $ 3,286     $ 3,014     $ (57

)

  $ (3,874

)

  $ 2,369  

 

NOTE 12.

STOCK-BASED COMPENSATION

 

Employee Stock Participation Plan (“ESPP”)

 

Our ESPP permits employees to purchase common stock through payroll deductions at a purchase price that is equal to 95% of our common stock price on the last trading day of each three-calendar-month offering period. Our ESPP is non-compensatory.

 

The following table summarizes our ESPP transactions during the fiscal period presented (in thousands, except per share amounts):

 

   

As of

June 29, 2014

 

Three Months Ended

June 29, 2014

   

Shares of

Common Stock

 

Shares of

Common Stock

 

Weighted

Average

Price

Authorized to issue

    4,500                  

Reserved for future issuance

    1,365                  

Issued

            7     $ 11.26  

 

Equity Incentive Plans

 

We currently have two equity incentive plans, in which shares are available for future issuance, the Exar Corporation 2006 Equity Incentive Plan (the “2006 Plan”) and the Sipex Corporation (“Sipex”) 2006 Equity Incentive Plan (the “Sipex Plan”), the latter of which was assumed in connection with the August 2007 acquisition of Sipex.

 

The 2006 Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, stock bonuses and other forms of awards granted or denominated in common stock or units of common stock, as well as cash bonus awards. Restricted stock units ("RSU”) granted under the 2006 Plan are counted against authorized shares available for future issuance on a basis of two shares for every RSU issued. The 2006 Plan allows for performance-based vesting and partial vesting based upon the level of performance. Grants under the Sipex Plan are only available to former Sipex’s employees or employees of Exar hired after the Sipex acquisition. At our annual meeting on September 15, 2010, our stockholders approved an amendment to the 2006 Plan to increase the aggregate share limit under the 2006 Plan by an additional 5.5 million shares to 8.3 million shares. At June 29, 2014, there were 0.7 million shares available for future grant under all our equity incentive plans.

 

 
20

 

 

Stock Option Activities

 

Our stock option transactions during the three months ended June 29, 2014 are summarized as follows:

 

   

Outstanding

   

Weighted
Average
Exercise
Price per
Share

   

Weighted
Average
Remaining
Contractual
Term

(in years)

 

Aggregate
Intrinsic

Value

(in thousands)

   

In-the-money

Options

Vested and

Exercisable

(in thousands)

 

Balance at March 30, 2014

    7,213,848     $ 8.98       5.02     $ 21,301       2,170  

Granted

    45,700       10.87                          

Exercised

    (105,751 )     6.99                          

Cancelled

    (133 )     15.67                          

Forfeited

    (385,098 )     10.12                          

Balance at June 29, 2014

    6,768,566     $ 8.96       4.84     $ 16,701       2,277  
                                         

Vested and expected to vest, June 29, 2014

    6,284,514     $ 8.84       4.75     $ 16,137          

Vested and exercisable, June 29, 2014

    2,526,817     $ 7.68       3.55     $ 8,955          

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value, which is based on the closing price of our common stock of $11.08 and $11.71 as of June 29, 2014 and March 30, 2014, respectively. These are the values which would have been received by option holders if all option holders exercised their options on that date.

 

In January 2012, we granted 480,000 performance-based stock options to our CEO. The options are scheduled to vest in four equal annual installments at the end of fiscal years 2013 through 2016 if certain predetermined market based financial measures are met. If the financial measures are not met, each installment will be rolled over to the subsequent fiscal year. In January 2014, we granted 140,000 performance-based stock options to our CEO. The options are scheduled to vest at the end of fiscal year 2017 if certain predetermined financial measures are met. We recorded $112,000 and $65,000 of compensation expense for these options in the three months ended June 29, 2014 and June 30, 2013, respectively.

 

Options exercised for the periods indicated below were as follows (in thousands):

 

   

Three months Ended

   

June 29,

2014

 

June 30,

2013

Intrinsic value of options exercised

  $ 430     $ 822  

 

RSU Activities

 

Our RSU transactions during the three months ended June 29, 2014 are summarized as follows:

 

   

Shares

   

Weighted
Average
Grant-

Date
Fair Value

   

Weighted
Average
Remaining
Contractual
Term

(in years)

   

Aggregate
Intrinsic

Value

(in thousands)

 

Unvested at March 30, 2014

    1,177,126     $ 10.94       1.62     $ 13,784  

Granted

    150,813       12.87                  

Issued and released

    (147,648 )     9.80                  

Cancelled

    (59,332 )     11.84                  

Unvested at June 29, 2014

    1,120,959     $ 11.30       1.61     $ 12,420  
                                 

Vested and expected to vest, June 29, 2014

    965,301               1.54     $ 10,696  

 

The aggregate intrinsic value of RSUs represents the closing price per share of our stock at the end of the periods presented, multiplied by the number of unvested RSUs or the number of vested and expected to vest RSUs, as applicable, at the end of each period.

 

 
21

 

 

For RSUs, stock-based compensation expense was calculated based on our stock price on the date of grant, multiplied by the number of RSUs granted. The grant date fair value of RSUs less estimated forfeitures was recognized on a straight-line basis, over the vesting period.

 

In March 2012, we granted 300,000 performance-based RSUs (“PRSUs”) to our CEO. The PRSUs are scheduled to start vesting in three equal installments at the end of fiscal year 2013 through 2015 with three year vesting periods if certain predetermined financial measures are met. If the financial measures are not met, each installment will be forfeited at the end of its respective fiscal year. We recorded $734,000 and $52,000 of compensation expense for these awards in the three months ended June 29, 2014 and June 30, 2013, respectively.

 

In the first quarter of fiscal 2014, we granted 50,000 PRSUs to certain executives. The PRSUs were scheduled to vest in three equal installments at the end of fiscal year 2014 with a three-year vesting period if certain performance measures are met. We recorded stock compensation recovery of $120,000 in the three month ended June 29, 2014 as a result of partially meeting the performance measurements by the executives and recorded $47,000 of stock compensation expense for these awards in the three months ended June 30, 2013.

 

In July 2013, as part of the acquisition of Cadeka, we agreed to pay retention bonus to certain former Cadeka employees and the bonus will be settled in RSUs subject to fulfillment of the service period. We recorded $394,000 of compensation expense for these awards in the three months ended June 29, 2014. The expense is reported in the other non-current obligations line in the condensed consolidated balance sheet as the total amount of bonus is to be settled in variable number of RSUs at the completion of the requisite service period. Such non-cash compensation expense is recorded as part of stock compensation expense in the condensed consolidated statement of operations.

 

In August 2013, we announced the Fiscal Year 2014 Management Incentive Program (“2014 Incentive Program”). Under this program, each participant’s award is denominated in stock and subject to achievement of certain financial performance goals and the participant’s annual Management by Objective goals. The expense is reported in the other current liabilities line in the condensed consolidated balance sheet as the total amount of bonus is to be settled in variable number of RSUs at the completion of the requisite service period. Such non-cash compensation expense is recorded as part of stock compensation expense in the condensed consolidated statement of operations. We recorded $5,000 of compensation expense for these awards in the three months ended June 29, 2014.

 

In October 2013, we granted 70,000 PRSUs to certain executives. The first 50% of the PRSUs are scheduled to start vesting in three equal installments at the end of fiscal year 2015 with a three-year vesting period if certain performance measures are met. The second 50% of the PRSUs are scheduled to start vesting in three equal installments at the end of fiscal year 2016 with a three-year vesting period if certain performance measures are met. We recorded $178,000 of compensation expense for these awards in the three months ended June 29, 2014.

 

In January 2014, we granted 82,500 PRSUs to certain former Stretch employees. The PRSUs are scheduled to start vesting in three equal installments at the end of fiscal year 2015 with a three-year vesting period if certain performance measures are met. We recorded $0 of compensation expense in the three months ended June 29, 2014 related to these PRSUs as the vesting of such PRSUs was not deemed probable.

 

Stock-Based Compensation Expense

 

The following table summarizes stock-based compensation expense related to stock options and RSUs during the fiscal periods presented below (in thousands):

 

   

Three Months Ended

 
   

June 29,

2014

   

June 30,

2013

 

Cost of sales

  $ 260     $ 142  

Research and development

    812       140  

Selling, general and administrative

    2,055       805  

Total Stock-based compensation expense

  $ 3,127     $ 1,087  

 

The amount of stock-based compensation cost capitalized in inventory was immaterial for all periods presented.

 

 
22

 

 

Unrecognized Stock-Based Compensation Expense

 

The following table summarizes unrecognized stock-based compensation expense related to stock options and RSUs for the period indicated below:

 

   

June 29, 2014

   

Amount

(in thousands)

 

Weighted Average Expected Remaining

Period (in years)

Options

  $ 9,349       2.5  

Performance Options

    606       2.0  

RSUs

    5,650       2.2  

PRSUs

    1,882       2.3  

Total Unrecognized Stock-based compensation expense

  $ 17,487